It’s hard to buy a car today, from a dealer, without having to pay $1000 or $2000 or more for a “service contract.” Some dealers pressure car buyers into these notoriously high-priced add-ons by telling them that if they don’t get the contract, the lender won’t approve their loan.

In some states, that is an unfair and deceptive trade practice. But it’s usually very difficult to prove.

What dealers won’t tell you is that they get hefty kickbacks from lenders, insurers, and other companies that sell service contracts, in exchange for selling them. A dealer may make more on the service contract than on the price of the car.

But are they a good deal for car buyers? According to Consumer Reports, based on the respected consumer magazine’s survey of 8,000 new-car buyers, the answer is NO.

Among the reasons service contracts tend to be a bad deal:

They often exempt coverage for pre-existing conditions, or items that are prone to break down.

They usually won’t cover prior damage, which gives the service contract company a convenient excuse to deny claims. If the car was in a wreck or flood, chances are the warranty will be partially or totally void.

Some dealers fail to forward the money you pay for the service contract. Instead, they pocket it and leave their customers in the lurch. It’s a very unwelcome surprise to find out that the coverage you thought you had — doesn’t even exist. Especially when you face an expensive repair. Even major franchised car dealerships have been caught engaging in this scam.

The products are overpriced. Based on loss/claims ratios, the charges are often outrageously high.

The contracts are written with many exclusions and limitations hidden in the fine print. Blown gasket? “Sorry — you can’t prove the used car you just bought had the oil changed every 3,000 miles. Claim denied.”

Some service contract companies have gone under, leaving both the consumers and dealerships holding the bag.  Even some that were highly rated by “objective” ratings companies were actually a stack of cards. This has happened over and over again.

Bottom line: You’re usually better off spending $100 to get a reliable, independent auto technician to inspect the car BEFORE you buy, rather than spending an extra $1000- $2000 for a worthless contract that is loaded with loopholes.

Read more:

Consumer Reports “Extended warranties: a high-priced gamble”